Reflections on the Obama Economy and Stimulus Plan

A recent InvestmentNews survey finds that the majority of money managers in the US don’t think Obama’s economic recovery plan will achieve its stated goal. Frankly, I’ve yet to hear any one plan I’m jumping for joy over. In my understanding of Obama’s plan, the economy would be stimulated using a bottom-up strategy rather than the Republican favored, top-down strategy of across-the-board tax cuts.

Obama believes creating jobs through state-government mandated infrastructure projects will jumpstart consumer spending and pull the economy out of any further immediate danger. It’s nearly impossible to know if this will work. And if it does, will it be a temporary, shot-in-the-arm stimulus which ultimately fails due to excessive debt burdens and mounting inflation? I don’t think across the board tax cuts would work any better if we’re truly aiming to stimulate the economy and get more dollars circulating. Politics will undoubtedly interfere with the Obama plan, and marginal tax rates will ultimately increase to balance future budgets and service debt.

I am somewhat intrigued by the idea of government assistance for past-due mortgage payments and renegotiations of mortgage rates and terms. This concept would at least chip away at the housing problems which are at the heart of the financial crisis. I also think eliminating mark-to-market accounting is crucial along with restoring the uptick rule. A real concerted effort is needed right now to mitigate the economic problems and restore some badly needed consumer confidence.

My concern with Obama’s plan is that the stimulus will be temporary. One scenario could be that we ultimately create three million jobs rather than four million, and the new trend of saving rather than spending will decrease the effect of the stimulus dramatically. Stats show that lower income Americans tend to spend the large majority of their earnings, but I think that may be changing in the foreseeable future.

The Obama plan may succeed in giving the Dow a temporary bounce, perhaps up to 9,000 or so. It would seem impossible that nearly a trillion dollars of stimulus doesn’t improve our economic stats for a few months. But once the dust settles and we start to ponder paying back the trillions of dollars we spent jump-starting the economy and bailing out the banks, then what happens? We raise taxes on the rich and on small businesses, lose more jobs as a result, and hope that Bernanke and his crew are right about their ability to contain inflation. If not, we get this inflationary deep recession which could easily push the Dow below 7,000.

As for the housing crisis, I firmly believe that 80% of the solution will happen naturally. Any attempt to ‘float’ home prices or spend money to keep people in homes which they can’t afford is absurd. If prices drop another 10% or so, new buyers will likely venture back into the market and scoop up deals. If prices drop back to 2000-2001 levels, the historical chart of national home price appreciation will start making sense again. As for areas with high rates of foreclosure and abandoned homes, I agree with the response given by the Feds lately that allowing regional clumps of foreclosures can be viral and ultimately reduce the property value of broader neighborhoods. We don’t need to be as concerned about foreclosures rates on a national basis: it’s the individual regions which require additional oversight to prevent the scenario of spiraling price declines.

In terms of dealing with the bleeding stock market, I think we have to at least temporarily eliminate mark-to-market accounting. These onerous requirements, designed to improve transparency and fairness for investors, have caused financial stocks to fall apart. In testimony Wednesday, Ben Bernanke first defended mark-to-market by saying it’s logical that investors should have the right to see the actual market value of assets rather than fake ‘book values’ and other bogus valuations designed to dress up balance sheets.

He went on to say that the large number of complex financial instruments we have here in the US along with many illiquid assets make it very difficult to implement a ‘real-time’ valuation. Bernanke said he supports the efforts to further analyze mark-to-market accounting and would like to especially improve the illiquid side of the market.

Similar comments were made with respect to the uptick rule. Bernanke wouldn’t comment too closely on the issue because it’s ultimately the responsibility of the SEC, but he did say they are giving careful consideration to its implications going forward. He certainly left the window open for restoring it. It doesn’t take a genius to realize short-selling by hedge funds and other market-moving investors have exacerbated the downtrend of financial stocks over the past six months.

If we can swiftly address all of the issues above in some kind of organized fashion, I genuinely believe our economy will come out better a couple years down the road. At this point we desperately need some confidence boosting to lift stocks and give ordinary citizens something positive to talk about.

Comments

[market ace:]

Why is every analysis about the economy strictly focused on what needs to be done to make the stock market go up? It would be nice to see people's savings and retirement accounts restored, but using gimicks and rule changes to accomplish that short term goal while creating even worse long term problems makes no sense.

I agree that trickle up is much better than trickle down, but seeing more welfare than reconstruction in the stim bill gives no one hope that it will do much to trickle things in any direction.

I hardly agree with Bernanke on anything, but on mark to market accounting I think he has a much better persepctive than the writer. A balance sheet is a snap shot of todays values and not projections of what may be realized in fututre years. Face it these banks are mostly bankrupt and they have to pay todays bills with todays assets at their current value. Changing the rules to artificially value them higher than their current value just to boost their stock price is WRONG and will not force them to take the corrective actions that they need to survive in the long run!

Feb 26 01:38 PM

[Jim Hawthorne:]

Excellent comment, sir! The economy doesn't exist for the sole benefit of the markets!

Take care of Main Street, and Wall Street will follow! We've had the cart before the horse for too damned long now!

As for suspending mark-to-market accounting, Japan tried it with disastrous results! Do you really want the foxes to have total run of the hen-house?

Replace mark-to-market with something better, by all means let's do it! Suspend it, and place all our trust and faith in Goldman, Sachs? No, thanks!

On Feb 26 01:38 PM market ace wrote:

> Why is every analysis about the economy strictly focused on what
> needs to be done to make the stock market go up? It would be nice
> to see people's savings and retirement accounts restored, but using
> gimicks and rule changes to accomplish that short term goal while
> creating even worse long term problems makes no sense... Changing >the rules to artificially value them higher than their current value just to >boost their stock price is WRONG and will not force them to take the >corrective actions that they need to survive in the long run!

Feb 26 02:28 PM

[Elliott:]

Bottoms up economics is what we need, not top down. After 8 years of too much supply side economics the economy is unbalanced and is starved for demand. The best way to stoke demand is to do exactly what Obama wants to do, which is to support the middle class with jobs, spending and targeted tax cuts. Sooner or later the wealthy class needs to realize that by squeezing the middle class for the last 8 years they have slit their own throat -- if the middle class were to disappear then the wealthy would have no one to buy the products their companies produce.

Feb 26 10:11 PM

[sether:]

Hey here's an idea, lets try the Keynes approach. Give it a real empirical test. I beleive Friedman et al have been fully debunked by now, though it took about 30 years and immeasurable economic misery (which is just beginning). Friedman had the greatest PR and marketing team of Wall Street parasites, GOP free-marketeers, and snake-oil theoriticians like Jude Wanniski and Arther Laffer to sell us his poison. We bought. It hasn't worked out so well, to say the least. Let's try something else, please, like maybe the opposite of what got us here.
And who at this point gives a * what Wall Street 'likes'. A good course of action could be calculated by figuring out what economic policies Wall Street likes the least, and implementing those.

Feb 27 01:22 AM

[fireball:]

russell
actually i can go along with the infrastructure improvement. it is the massive pork riding on it that is outrageous.
so if i get in trouble with a credit card i just get another with a larger line of credit so i can pay the old one and keep spending....repeat process....repeat process....repeat, repeat, repeat...eventually i will spend my way out of trouble....great plan.
if we try that as citizens at best we are on the street penniless. if justice is served we are in jail.
i do not believe government of either party can fix what they allowed and at least partially caused. when i say partially i am being kind.
better get ready to take care of yourselves america.

Feb 27 04:26 PM

[tom the iri...:]

Why not give every man, women and child $1 million ( pop as of 2/18/09 ) for a cost of $ $306 billion which is $900 billion less than the stimulus. It would cause an immediate surge in consumer spending. Would allow free market to force the auto industry and Wall Street to correct their problems if they are to compete successfully for consumer dollars.
Guidelines, half of funding must go into savings accounts thus stimulating banks. Grants to children could be held in trust until they are 18. The homless could buy homes, the sick get medical help and foreclosures would be stopped.
Welfare spending, unemployment compensation, social security payments and the like could be suspended leading to additional savings. Stimulus money paid to citizens could be taxed as income producing.. Which is better ? To spend $1.2 trillion on a plan targeting to bailout those that caused the problem that may not work or giving the money to the U.S, citizens?
This is not my proposal. but it makes sense to me.

Feb 27 06:47 PM

[Hmm?!:]

Bottom Line

No country in the history of the world has borrowed, taxed or spent its way to prosperity. And I do not see that changing now.

John Maynard Keynes proposed that government could SAVE money during expansions and SPEND during recessions to help minimize the impact of natural economic cycles. But he also specifically spoke out publicly against DEFICIT spending.

Feb 28 02:41 AM

[Hmm?!:]

Irishman,

$306 billion divided by 300 million is only about $1060 dollars each.

Hence the old saying.........."God invented whiskey.......so the Irish would never rule the world!".

Feb 28 02:50 AM